Can lenders do more to halt foreclosures?

When Eddie Zepeda bought his house in a San Diego suburb four years ago, it was worth $440,000. Today it's valued at $365,000, even after $32,000 of home improvements. To make matters worse, he's been paying an extra $700 a month ever since his mortgage rate reset two years ago.

He has tried to adjust, but a second job couldn't cover the extra payment. Five banks refused to help him refinance. "They all just told me to hold on tight," he recounts.

That's why Mr. Zepeda contacted You Walk Away, a new and fast-growing website that advises homeowners if foreclosure is their best available option. Zepeda decided it was. "My bank gave me no options," he says.

As foreclosures rise and Congress searches for ways to help homeowners avoid them, a key question is what lenders are doing to ease the crisis that they helped create. Banks and other mortgage-servicing companies point to the rising number of loan modifications and other deals they're striking with at-risk borrowers as evidence that they're tackling the problem. Critics from homeownership advocates to Federal Reserve Chairman Ben Bernanke say they can do more. Some in Congress want to pass laws that would allow bankruptcy judges to force lenders to do more, though it's not part of the current bipartisan Senate bill.

At the heart of the debate is the insidious effect of foreclosures. When they happen, homeowners lose their homes and what they've invested in them. Lenders lose, by one estimate, half the value of the entire loan by the time they've resold the property. If foreclosures proliferate, entire neighborhoods lose as housing values drop.

In 2007, there were 509,000 foreclosures completed, according to Hope Now, a cooperative program of the US government, counselors, investors, and lenders. With the number at an all-time high, banks and other mortgage lenders have begun to look for other solutions. New York-based financial giant Citigroup reports that its refinance and loan-modification deals outnumber foreclosures completed by 5 to 1. Nationwide, the number of loan modifications nearly tripled between the first and fourth quarters of last year, according to Hope Now.

Of course, there's only so much lenders can do. Some homeowners are so far in debt that foreclosure is the only realistic answer. In other cases, lenders worry that if they restructure a loan and home prices fall further, they might have to write down the loan value even more, Mr. Bernanke said in a speech to community bankers last month. Even if a lender wanted to modify loans, many mortgages have been bundled and sold to investors, some of whom might sue if a lender accepted a lower return.

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